11 January 2013

Although Tim works for Tullett Prebon, I do not try to influence his work as I value independent research and I have worked with him on and off for over 20 years at three different companies, so it is obvious that I respect his work.

I agree with his conclusions, namely:

1. the facts are simple enough. Britain and the US are much poorer than they were. In fact, since the pre-2008 “boom” was actually borrowing masquerading as “growth”, it’s truer to say that they are poorer than they thought they were. These are borrowing-junkie economies, and

2. I believe that the British and American electorates could face the facts if these were put before them truthfully. But truth, as many politicians know, is a dangerous substance, best handled with care – and saved for special occasions.

08 January 2013

I sent this New Year’s card to all our MPs and Peers to remind
them of the dire state of the UK’s finances by comparing them to a household
budget:

The Times City Diary (£) seems to mistakenly think that I am
advocating that the UK should “look West” to what America is doing,
presumably because there is a picture of Abraham Lincoln on the front of the
card. No, the reason for the picture of Lincoln is the quote inside the card
about trusting people by telling them the truth.

Meanwhile, City Spy at the Evening Standard grandiloquently
proclaims that I am ‘wrong-footed over Lincoln’ because I have failed to spot
two facets of the situation: a) ‘there’s little sense in comparing the national finances to a household
budget. What may be good for one household is not good for the wider economy.
If we all save at the same time, it’s disastrous’; and b) ‘Moreover, households
can’t print money: governments issue their currencies and they can spend it,
but households have to save to spend in the future.’

I have news for City Spy. I had spotted those
points, but maybe the answer to the first is that yes, it is disastrous because
that’s what we’re going to have to do. There may be no painless way out of
this, because it is indeed a disastrous predicament. As regards governments
printing money, amazingly enough I had spotted that (hard to miss £375 billion
of Quantitative Easing) but I have to admit that I had not realised that there
was someone at the Evening Standard simple minded enough to think that is
really a solution. Who says standards of journalism have fallen?

The point of the analogy to a
household-budget illustration I used which has been missed by this journalistic
statement of the blindingly obvious is to make the UK’s financial situation
more understandable. It is very hard for anyone to get their minds round the
concept of a billion let alone a trillion. I think if people really understood
the position the UK finds itself in they may be better prepared for what surely
has to come and what has to be done, and it makes it clear that the current
policies are not capable of correcting the situation.

26 December 2012

I’ve maintained from the outset that whether or not the US goes over the endlessly talked about Fiscal Cliff is largely irrelevant as it will require much more drastic action than that to correct the US deficit.

If you want to gauge the enormity of the US debt situation take a look at this video clip of the motivational speaker Tony Robbins ‘deconstructing’ the situation:

It appears that the Canadian Prime Minister agrees with me about the US debt situation.
He commented upon it in a year end interview with Global News as reported here in The Vancouver Sun, describing the US debt situation as a ‘runaway train’.

He expressed these views despite predicting that some sort of compromise will be reached on the so-called Fiscal Cliff which I have also maintained is largely irrelevant.

Interestingly he also expressed the view that some people are living in a fool’s paradise because they are lulled into thinking that they are living within their means by low interest rates and would be unable to cope if or when rates begin to rise. This is especially true of many of the people who are operating on interest only mortgages, as well as the governments of the United States and the UK.

21 December 2012

My recent post The Beverley Hillbillies and the Fiscal Cliff sparked considerable debate amongst some of my regular readers. With this in mind I wanted to write a detailed response, specifically to the interesting points raised by Algernon Percy on the current fiscal position of the US.

Algernon Percy said:Remember that this imaginary household ('back of the envelope' figures) – 1) Lives in, and owns a house worth $563,000 (total value of tangible assets in America) 2) Has total wealth of approximately $750,000 (a capital base which is growing all the time) 3) Is able to print / devalue the currency The household is therefore approximately 15% geared, but interest cover is 40 x (GDP/ interest cost), the household is in work (becoming more busy by the day) and its income and asset base is growing all the time. Also, new joiners are joining the household (immigration). Conclusion – It’s certainly not the way I’d run my household, but as an outside observer, I’m not too concerned that they are going to hit the rocks.

I think Mr Percy is making a fundamental mistake: my original blog post took the state of US government finances and turned them into a household budget of the sort Jed Clampett might have understood. Mr Percy suggests that I am wrong to worry about the US financial position on this basis because of the private sector’s assets. But if we bring in the private sectors assets, we will also have to bring in their debts, and I also have some doubts about the assets.

The debt figure I quoted is just Federal debt. The total debt is far higher. On top of the $11,279bn of Federal debt, we must add:

▪ State and local government debt ($3,008bn)▪ Private debt ($41,071bn)

Then there’s quasi-debt and off balance sheet debt:

▪ Federal debt owned by the welfare agencies ($4,711bn) ▪ Pensions owed to Federal employees ($5,792bn) ▪ Forward welfare commitments, in excess of assets, owed by Social Security (“OASDI”) and Medicare. I’ve reduced this from the official (75-year) number to a shorter (30-year) period, but still come to $36,472bn. (Others, such as Laurence Kotlikoff, put the quasi-debt number very much higher than this).

So total debt, for the all the Clampetts (now defined as America-private and government) averages $553,579, rising to $1,023,329 if we include quasi-debt:

$

Clampetts

$bn

Private

$41,071,400,000,000

$410,714

$41,071

Government debt:

Federal debt

$11,278,900,000,000

$112,789

$11,279

State & local debt

$3,007,600,000,000

$30,076

$3,008

Total government debt

$14,286,500,000,000

$142,865

$14,287

Total debt

$55,357,900,000,000

$553,579

$55,358

Intra-agency

$4,711,000,000,000

$47,110

$4,711

Pensions

$5,792,000,000,000

$57,920

$5,792

Medicare and OASDI

$36,472,000,000,000

$364,720

$36,472

Quasi-debt

$46,975,000,000,000

$469,750

$46,975

Government debt & quasi-debt

$61,261,500,000,000

$612,615

$61,262

Grand total

$102,332,900,000,000

$1,023,329

$102,333

Turning to the assets, according to the Fed, household assets, at the end of 3Q 2012, were $78,204bn, pretty close to Mr Percy’s total. But the validity of the asset figures for this purpose (debt service) is highly debateable.

Real estate is worth what it can be sold for. You cannot sell a country’s entire housing stock, so any real estate value for this purpose is is notional. (This where the household analogy breaks down-you might choose to live beyond your means and realise your property assets but a whole nation can’t). They can only sell homes to other Americans - so they are worth what their fellow citizens can afford to pay you, a zero-sum figure. The boomer generation, who will need to monetise these assets, will have to sell them to a younger generation, who are fewer in number, and poorer.

Stocks-Again, you cannot monetise the whole lot, so the capital value is largely notional en masse.

So very little of the assets are actually cash-equivalent and available to service the debts. That needs to be done from the income of $23,480pa. So I think that America is closer to those rocks than Mr Percy thinks.

I received some interesting responses to my blog post on The Beverley Hillbillies and the Fiscal Cliff. I thought that the best way to respond was with another post, in particular to respond to Alan Wolstenholme, John Healy and Alan Gizzard

Here are the equivalent UK and European figures:

With help from my colleague Dr Tim Morgan, I have used the revenue, spending, deficits and debts for each country for 2011 and the supposed cuts (from IMF numbers) between 2011 and 2013.

Taking eight zeros off as I did for America each doesn’t work, as populations are far smaller and you end up with tiny numbers. So I adjusted pro-rata for population.

20 December 2012

As the US Fiscal Cliff melodrama heads towards its climax I thought I would offer an observation based upon the 60s US TV sitcom series-the Beverley Hillbillies.

For those of you who are too young to remember, the series was about a family of backwoodsmen-the Clampett family-who discover oil on their land and become rich as a result. They move to Beverley Hills and the series was mainly based around the culture clash between the Clampetts with their unsophisticated and minimalist lifestyle, and the social mountaineers of Beverley Hills, most notably their neighbour Mr Drysdale who runs the local bank. Drysdale has to engage in increasingly outrageous manoeuvres to keep the Clampetts in Beverley Hills and their money in his bank. It sounds like a moral tale for our time. Is life now imitating art, or at least a 60s sitcom?

In one episode, Jed the patriarch of the Clampetts decides that he doesn’t trust the bank to take care of his money (a man ahead of his time perhaps?) and goes to withdraw it. He has $7,000,000 deposited and says he is withdrawing $7 because a) he doesn’t trust the bank with that much money; and b) he thinks he only has $7 as ‘everyone knows zeroes don’t mean anything’.

What’s this got to do with the US Fiscal Cliff negotiations?

As my friend Nick Carn of Carn Macro Advisers (www.carnmacro.com) points out, the US budget numbers can be viewed in a similar fashion to Jed Clampetts view of his bank balance as follows:

* U.S. Tax revenue: $ 2,348,000,000,000

* Fed budget: $ 3,661,000,000,000

* New debt: $ 1,313,000,000,000

* National debt: $ 11,279,000,000,000

* Recent budget cuts: $ 24,000,000,000

(Sources: FY 2011 figures from Financial Report of the United States Government (FRUSG) and the President’s proposed cuts as per the White House Budget Department)

As you can see as a result of this, the US budget situation is dire. The inadequacy of what is being proposed compared with the size of the problem is simply stunning as I hope this simple example illustrates. The reason why I have said when asked that whether or not the US goes over the so-called Fiscal Cliff is largely irrelevant is that neither the changes caused by that nor the proposals being negotiated between the President and Mr Boehner are going to have anything like enough impact to begin the necessary process of correction in America’s situation. At some point America will need massive tax increases and spending cuts.

18 December 2012

I thought I would share some of my recent comments on the view of the next Bank of England Governor Mark Carney that central banks could consider more radical measures such as growth targets. The Chancellor has said that it is "good there is a debate" over the Bank of England's inflation target policy.

I think it would be a mistake to extend the Bank of England’s targets for a number of reasons. Central bankers should only concern themselves with sound money which includes inflation and, if they have got the authority to regulate it, the safety of the financial system. Any targets other than those, such as promoting growth or employment, takes them into territory which should be reserved for elected politicians and would only serve to confuse or conflict with their core mandate. Indeed, the core role of central bankers is to prevent politicians, most or all of whom seem to have (re)election as their main aim, perverting the currency and/or the financial system in pursuit of their careers.

I discussed this topic on the BBC Radio 4 Today Programme last week. You can listen to the interview in full here (click forward to 1:51).

I think it is premature for George Osborne to have declared that Mr Carney is the outstanding, preeminent central bank of his generation. Canada’s good performance during the credit crisis cannot be attributed to him as he only became Governor in 2008 by which time the die was well and truly cast. Canada’s success owes far more to the foundations from the actions of the Canadian government which took office in 1994 and resolved to turn a deficit of 10% of GDP into a surplus which it achieved in three years. It is also worth noting that Mr Carney will leave his post after rapid inflation of Canadian property prices which looks like it may cause a problem.

Mr Carney has the advantage of youth. He has the disadvantage that he has never lived through a period of high inflation. But he may get to do so. The debate about central bank policy aims which he sparked comes hot on the heels of the Fed doubling the size of its monthly purchase of bonds in its programme of Quantitative Easing and proclaiming that it will continue with this policy until employment falls below 6.5%. It was swiftly followed by the landslide election victory of the LDP in Japan who say they will tell the Bank of Japan to pursue a 3% inflation target in order to promote growth.

None of these people fear inflation, which is exactly the time when it is likely to re-emerge. If it does so, it may not stop at convenient pre-ordained levels which these newly mandated central bankers are aiming for and if it does run out of control what levers will they pull to halt it? Raising interest rates? That would have an interesting effect on government finances and the economy.

In my view the world’s most outstanding extant central banker is Paul Volcker. Take a look at his track record on these matters.